Three Potential SEC Actions on ESG Reporting: Is Your Company Ready?

Over the course of the 2020 election and leading up to the inauguration, President Joe Biden laid out a sweeping agenda to address climate change using all levers of government. With Democrats settling into a razor-thin majority in the Senate, however, passing an ambitious legislative package through Congress may be an uphill battle.

Even so, there are many actions that the executive branch can take on its own, including one of particular significance to corporate America: mandating companies publicly disclose climate-related risks and report greenhouse gas emissions stemming from their operations and supply chains.

The vehicle for this would be the Securities and Exchange Commission (SEC), which regulates what information public companies have to share with investors. With a 3-2 Democratic majority under Biden, the five-member commission could issue new rules that require companies to release more details about their environmental, social and governance (ESG) practices and impacts.

What will the SEC do under President Biden?

Mandating ESG disclosures could take several forms such as:

A focus specifically on drivers of climate change. In 2019, Sen. Elizabeth Warren (D-Mass.) introduced the “Climate Risk Disclosure Act of 2019,” which proposes to direct the SEC “to require an issuer of securities to annually disclose information regarding climate change-related risks posed to the issuer, including an issuer’s strategies and actions to mitigate these risks. Among other things, issuers must report their direct and indirect greenhouse-gas emissions, disclose their fossil fuel-related assets, and establish standards regarding the social cost of carbon.”
Requiring public companies to release a broader set of ESG metrics that cover not just climate change, but also other topics, including workforce diversity and community engagement. In 2018, a group of investors with more than $5 trillion in assets under management petitioned the SEC to mandate comprehensive ESG disclosures, arguing that such information would help them identify risks across the companies in which they invest.
Specifying which reporting framework companies should use to disclose their ESG information. Many investors, such as BlackRock and members of the Investment Company Institute, currently prefer the Sustainability Accounting Standards Board’s (SASB) guidelines. They are also urging companies to provide climate-specific information that is consistent with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). A survey of institutional investors in March 2020 found that 81 percent of respondents recommend that companies use the SASB framework to better communicate ESG information and 77 percent recommend the TCFD framework for disclosure of climate-related financial information.

What can companies do to prepare for new SEC rules?

The SEC’s rule-making process takes time — new ESG disclosure requirements likely won’t be completed until 2022 at the earliest. That gives companies time to get ahead of these changes by improving their sustainability reporting. Given investors’ current preference for the SASB and TCFD standards, public companies should ensure they are disclosing against those frameworks while keeping a close eye on the push toward a global reporting system.